Prudence prevails: On keeping monetary policy disinflationary
Policymakers must continue to keep the focus on slowing price gains
The RBI’s Monetary Policy Committee (MPC) has prudently opted to persist with its objective of ‘ensuring that inflation progressively aligns to the target’ by keeping benchmark interest rates unchanged, and sticking with its stance of ‘withdrawal of accommodation’. With a 5-1 majority, it has committed to keeping monetary policy unambiguously disinflationary so as to anchor inflation expectations, especially at a time when ‘large and repetitive price shocks are interrupting the pace of disinflation’. On the rationale to leave the repo rate unchanged at 6.5% for a sixth straight meeting, Governor Shaktikanta Das observed that while domestic economic momentum remained strong, uncertainties in food prices continued to impinge on the headline inflation trajectory. The tangible risk that food price pressures could become more generalised and impact broader headline inflation was the main consideration, he explained. That the majority of the MPC was aligned in prioritising the battle against inflation needs to be seen in the backdrop of the recent trends in retail inflation. Headline retail inflation, which had eased from July’s 15-month peak of 7.4% to 4.87% in October, however, rebounded to a four-month high of 5.69% in December, with food price gains gauged by the Consumer Food Price Index racing ahead to 9.53%, a sizeable 292 basis points faster than October’s 6.61%.
That the uncertainty surrounding food price gains has begun to vex policymakers is reflected in a recent RBI Bulletin article that pointedly sought to find an answer to the question, ‘Are Food Prices the ‘True’ Core of India’s Inflation?’. Concluding that there is enough empirical evidence to support an assertion that ‘there are times when food inflation mimics core inflation’, the officials caution that given food’s substantial share in the consumption basket, large and repeated food price shocks have the potential to ripple outward and undermine the goal of price stability by de-anchoring inflation expectations. The MPC’s downward revision of its projection for average retail inflation in the January-March quarter to 5.0%, 20 basis points lower than its December forecast, reflects the small comfort policymakers have taken from the improvement in rabi sowing as well as a seasonal correction in vegetable prices. Still, the Department of Consumer Affairs’ daily price monitoring dashboard shows the average retail price of more than two-thirds of the key food items it tracks remained higher on a year-on-year basis as on February 8. Policymakers need to stay steadfast in their resolve to durably slow price gains towards the 4% target or risk dampening consumption and thereby undermining the growth momentum.